IPTM7395 - Chargeable events on void ISAs: termination events

Void ISAs

In order for an insurance policy to be held as a qualifying investment in a valid ISA it must meet various conditions. These conditions are described in the ‘ISA managers’ guidance’ (under ‘Check if a life insurance policy can be included in an investor’s ISA’), which can be found on the HMRC website.

One of those conditions is that the contractual terms of the policy provide that the policy is automatically terminated if it comes to the notice of the ISA manager that the ISA is void because the ISA conditions are, or have been, breached.

The ISA is ‘void’ and the policy should automatically terminate (policy in a void ISA) where:

  • the conditions relating to policy loans or connected policies have been fouled
  • any of the qualifying conditions including those applicable to the investor or the ISA manager are not satisfied, for example where an investor wasn’t eligible to subscribe to the ISA (who can subscribe to an ISA).

Meaning of ‘termination event’

If either of the voiding circumstances in the paragraph above has occurred then a ‘termination event’ is deemed to arise.

The ‘termination event’ is defined as the first to occur of either:

  • the voiding circumstances coming to the notice of the ISA manager, or
  • the coming to an end of the policy (the end of the final insurance year – see IPTM3505).

Thus if the policy has already come to an end through surrender, death or maturity before it has come to the attention of the ISA manager that the ISA is void, there is still a termination event, occurring on the date that the policy comes to an end.

The date of a termination event is the date when it came to the notice of the ISA manager that the ISA is void or, if earlier, when the policy ended, not when the ISA actually became void.

Termination event is deemed to be a chargeable event

The termination event is deemed to be a surrender chargeable event. A gain calculation must be carried out as if the policy had been surrendered on the date of the termination event for the surrender value on that date, in accordance with the normal calculation rules described in IPTM7510.

If there is a gain on the termination event then the investor is taxable on the gain and a chargeable event certificate must be issued to the ISA investor and, in the unlikely event that the gain is large enough, to HMRC as described in IPTM7220.